Dividends and Investors (Part 2)

Oh, grow up.

That’s the advice people need when they act immature. And it’s the advice a lot of companies need, especially regarding their dividend policy.

When a company is young, it needs all the cash it generates just to survive. Later on, growth opportunities abound. The firm can either invest in its own product line, or it can make strategic acquisitions and build out its business.

But there comes a time when a successful corporation needs to return cash to its shareholders. Years ago Microsoft did just that. They had begun paying a small dividend, but in late 2004 they distributed some of their accumulated cash and made a one-time payment of $25 billion. The dividend was so huge that it affected some of the aggregate US economy statistics.

After that, they became more aggressive with their dividends, increasing payments by about 10% a year. There’s no reason why this can’t continue–their earnings have grown about 10% a year as well, and they earn three times as much as their dividend payment. And they still have an ample cash position.

Dividend policies are important. Maturing companies shouldincrease payments to shareholders, who may have better things to do with the money. The primary question is whether management is as mature as the company is.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-11T15:32:38+00:00 June 28th, 2010|Global Market Update|0 Comments

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